Q&A: M S Sahoo, Former member, Sebi

'Regulators should have long, secure terms'

From eighth floor office at Sebi Bhavan, Madhu Sudan Sahoo kept a close eye on three extraordinary years in the Indian capital market history. The former whole-time Sebi member was part of a team “that successfully handled successive difficult situations”. Containment of aftershocks of the post-Lehman crisis, reconstruction of Satyam, closing trading during 26/11 and distribution of money disgorged from fraudsters to victims of the IPO scam are the decisions, many made in quick time, of which he is proud. In an interview to N Sudaresha Subramanian, he talks about these and other issues. Edited excerpts:

We understand you’ve taken up a legal practice. Are you joining any firm or going alone?
This was one of my passions. I attempted to pursue this a few times earlier, but something or the other came on the way. Given my experience in the securities market for the last 17 years from three main strategic points, namely, Sebi, the stock exchange and the ministry of finance, and being associated with drafting of all major legislations and regulations in this area, coupled with a large number of quasi-judicial orders passed by me (as wholetime member, Sebi), the natural choice for practice is the securities laws. I have enrolled as an advocate and started practice independently.

Though Sebi has improved a lot in investigation and adjudication functions, the quality of enforcement of orders is still a challenge.
There has been substantial improvement in the recent past. Nevertheless, there is scope for more improvement. A specialised cadre of officers could be developed. Some process improvement can bring in quick gains. Some practices from courts could be profitably used in Sebi proceedings. A bench of inter-disciplinary officers unrelated to the case, rather than one officer, could pass enforcement orders. The case of Sebi could be made out by a presenting officer/legal counsel before the bench. No order should be passed without fully complying with the principles of natural justice. Multiple proceedings for the same set of facts should be avoided to avoid contradictory findings.

Another big challenge for regulators today is protecting their independence. How should regulators deal with this?
In a democracy, no public agency is independent. No regulator wishes independence from legislative/judicial scrutiny. It boils down to independence from the executive, of which it is an extension. The executive generally has three kinds of interactions with the regulators. It serves as the link between legislature and regulators, has powers to give directions in matters of policy and determines the terms of chairman and members of the regulatory bodies. The independence can be enhanced if the regulators explain their conduct/performance directly to the legislature as much as possible, the executive gives directions in matters of policy, whenever necessary, in a transparent manner, and the chairman and members of regulatory bodies have a reasonably long but secure tenure, similar to those available for constitutional functionaries. Financial autonomy is desirable, though not necessary, to ensure independence of regulators.

If there a lack of coordination among regulators, enabling smart entities thriving on regulatory arbitrage? How can this be addressed?
Regulatory arbitrage can be avoided if the activities/products are clearly demarcated under the jurisdiction of different regulators. No two similar activities/products should come under the jurisdiction of two regulators. This requires careful drafting of the legislation which defines the jurisdiction of different regulators. Wherever it is not possible, the regulators should adopt common standards for similar activities. For example, an intermediary should be a fit and proper person, whether it offers services under the jurisdiction of Sebi, Irda, PFRDA or RBI.

What is your comment on the ongoing controversy at Sebi involving your former colleagues?
Unfortunate.

Can you suggest a few measures to enhance the confidence of investors in the market and help protect their interests?
A lot. I would strongly recommend a group insurance plan that would indemnify the loss caused to a small investor on account of fraud, if he cannot be compensated otherwise, such as through disgorgement. This could be funded from public funds like the investor protection funds with Sebi and market participants. The second is regulation of investment advisers. Howsoever educated an investor may be, he needs advice while taking investment decisions. The system needs to provide an arrangement which grooms a cadre of professionals who can render investment advice with accountability.

What is your wish list for the capital market in the next three years?
A stronger Sebi, which provides the comfort to investors and market participants to participate in the market with confidence. This would ensure promotion of the securities market as an engine of growth of the economy.